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Political Risk of Social Security: The Case of the Indexation of Benefits in the Czech Republic

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  • Libor Dusek

Abstract

We contribute to the literature on the political risk of social security by extending Feldstein and Ranguelova's (2001) methodology for measuring risk in a funded pension system to a pay-as-you-go system. We use the methodology to assess the risk over indexation of benefits in the Czech Republic during the 1990's and early 2000's. The government's discretion over indexations creates both aggregate and individual risk and makes the Czech Republic a particulary interesting case to study. Using data on the actual evolution of benefits for people who retired between 1988 and 1995, we find that retirees faced fairly large volatility in the changes in real benefits - while the mean percentage change was 1.2, its standard deviation was 4.3. This volatility reduces the expected utility of retirees by 0.8 to 1.3 percent of equivalent consumption.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp318.

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Date of creation: Mar 2007
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Handle: RePEc:cer:papers:wp318

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Keywords: Social security; political risk; pension reform.;

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  1. Feldstein, Martin & Ranguelova, Elena, 2001. "Individual Risk in an Investment-Based Social Security System," Scholarly Articles 2797440, Harvard University Department of Economics.
  2. Douglas H. Joines, 2005. "Pareto-Improving Social Security Reform," 2005 Meeting Papers 396, Society for Economic Dynamics.
  3. John McHale, 2001. "The Risk of Social Security Benefit-Rule Changes: Some International Evidence," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 247-290 National Bureau of Economic Research, Inc.
  4. John B. Shoven & Sita N. Slavov, 2006. "Political Risk Versus Market Risk in Social Security," NBER Working Papers 12135, National Bureau of Economic Research, Inc.
  5. Martin Feldstein, 2005. "Structural Reform of Social Security," NBER Working Papers 11098, National Bureau of Economic Research, Inc.
  6. Martin Feldstein & Elena Ranguelova, 2001. "Individual Risk in an Investment-Based Social Security System," American Economic Review, American Economic Association, vol. 91(4), pages 1116-1125, September.
  7. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Gerontocracy, Retirement, and Social Security," NBER Working Papers 7117, National Bureau of Economic Research, Inc.
  8. Feldstein, Martin, 2005. "Structural Reform of Social Security," Scholarly Articles 2794830, Harvard University Department of Economics.
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